Microeconomics Test 4

A classification system for the key traits of a market, including the number of firms, the similarity of the products they sell, and the ease of entry into and exit from the market.

Market Structure

A market structure characterized by (1) a large number of small firms, (2) a homogeneous product, (3) very easy entry into or exit from the market. Perfect competition is also referred to as pure competition.

Perfect Competition

Any obstacle that makes it difficult for a new firm to enter a market.

Barrier to entry

A seller that has no control over the price of the product it sells.

Price taker

The change in total revenue from the sale of one additional unit of output.

Marginal revenue (MR)

A firm's marginal cost curve above the minimum point on its average variable costs curve.

Perfectly competitive firm's short-run supply curve

The supply curve derived from horizontal summation of the marginal cost curves of all firms in the industry above the minimum point of each firm's average variable cost curve.

Perfectly competitive industry's short-run supply curve

The curve that shows the quantities supplied by the industry at different equilibrium prices after firms complete their entry and exit.

Perfectly competitive industry's long-run supply curve

An industry in which the expansion of industry output by the entry of new firms has no effect on the firm's average total cost curve.

Constant-cost industry

An industry in which the expansion of industry output by the entry of new firms decreases the individual firm's decreases the individual firms's average cost curve (cost curve shifts downward).

Decreasing-cost industry

An industry in which the expansion of industry output by the entry of new firms increases the individual firm's average total cost curve (cost curve shifts upward).

Increasing-cost industry

Explain why a perfectly competitive firm would or would not advertise.

A perfectly competitive firm will not advertise. Because all firms in the industry sell the same product, there is no reason for customers to be influenced by ads into buying one firms's product rather than another firm's product.

Perfect competition is defined as market structure in which
A) there are many small sellers.
B) the product is homogeneous.
C) it is very easy for firms to enter or exit the market.
D) All of the above answers are correct

~D~

Under perfect competition, which of the following are the same (equal) at all levels of output?
A) Price and Marginal cost
B) Price and marginal revenue
C) Marginal cost and Marginal revenue
D) All of the above answers are correct

~B~

A portrait photographer produces output in packages of 100 photos each. If the output sold increases from 600 to 700 photos, total revenue increases from $1,200 to $1,400. What is the marginal revenue per photo?
A) $200
B) $100
C) $20
D) $2
E) $1

~E~

$1400-$1200=$200

*New Revenue - Old Revenue = increase:decrease

$200/100=$2.00

*Increase:Decrease / package output = Marginal revenue per photo

In the short run, a perfectly competitive firm is producing at a price below average total cost. What is its economic profit?
A) Positive
B) Zero
C) Negative
D) Normal

A perfectly competitive firm's short-run supply curve is
A) the segment of the marginal cost curve above average fixed cost
B) the segment of the marginal cost curve above the minimum level of average variable cost.
C) the upward-sloping segment of the marginal cost curve.
D) both a and b

~B~

In long-run equilibrium, the perfectly competitive firm sets its price equal to which of the following?
A) Short-run average total cost
B) Short-run marginal cost
C) Long-run average cost
D) All of the above answers are correct

~D~

If there is a permanent increase in demand for the product of a perfectly competitive industry, the process of transition to a new long-run equilibrium will include
A) the entry of new firms
B) temporarily higher profits
C) both a and b
D) neither a nor b

~C~

A market structure characterized by (1) a single seller, (2) a unique product, and (3) impossible entry into the market.

Monopoly

An industry in which the long-run average cost of production declines throughout the entire market. As a result, a single firm can supply the entire market demand at a lower cost than can two or more smaller firms

Natural monopoly

A good that increases in value to each user as the total number of users increases. As a result, a firm can achieve economies of scale. Examples include Facebook and Match.com

Network good

A firm that faces a downward-sloping demand curve and therefore it can choose among price and output combinations along the demand curve.

Price maker

The practice of a seller charging different prices for the same product that are not justified by cost differences.

Price discrimination

The practice of earning a profit by buying a good at a low price and reselling the good at a higher price

Suppose a monopolist's demand curve lies below its average variable cost curve. The firm will
A) stay in operation in the short run
B) earn an economic profit
C) earn an economic profit in the long run
D) shut down

~D~

Which of the following statements best describes the price, output, and profit conditions of monopoly?
A) price will equal marginal cost at the profit-maximizing level of output, and profits will be positive in the long run.
B) Price will always equal average variable cost in the short run, and either profits or losses may result in the long run.
C) In the long run, positive economic profit will be earned.
D) All of the answers above are correct.

~C~

Which of the following is true for the monopolist?
A) Marginal revenue is less than the price charged.
B) Economic profit is possible is the long run.
C) Profit maximizing revenue equals marginal cost.
D) All of the answers above are correct.

~B~

Although a monopoly can charge any price it wishes, it chooses
A) the highest price.
B) the price equal to marginal cost.
C) the price that maximizes profit.
D) competitive prices.
E) a fair price.

~E~

Suppose a monopolist charges a price corresponding to the intersection of marginal cost and marginal revenue. If the price is between its average variable cost and average total cost curves, the firm will
A) earn an economic profit
B) stay in operation in the short run, but shut down in the long run if demand remains the same.
C) Shut down
D) None of the above answers is correct.

~B~

The act of buying a commodity in one market at a lower price and selling it in another market at a higher price is known as
A) buying long.
B) Selling short
C) a tariff.
D) arbitrage

~D~

One necessary condition for effective price discrimination is
A) identical tastes among buyers.
B) a difference in the price elasticity of demand among buyers
C) a single, homogeneous market
D) two or more markets with easy resale of products between them.

~B~

An example of price discrimination is the price charged for
A) an economics textbook at a campus bookstore
B) gasoline
C) theater tickets that offer lower prices for children
D) a postage stamp

~C~

Suppose a monopolist and a perfectly competitive firm have the same cost curves. The monopolistic firm would
A) charge a lower price than the perfectly competitive firm.
B) charge a higher price than the perfectly competitive firm.
C) charge the same price as the perfectly competitive firm.
D) refuse to operate in the short run unless an economic profit could be made

~B~

Suppose there are two markets for football games: (1) rich alumni as fully committed to their Alma mater as the lower-income students and (2) students. Based on this information, which market will have the lower elasticity, and thus the higher price, if the university can price-discriminate?
A) the student market
B) the alumni market

~B~

A market structure characterized by (1) many small sellers, (2) a differentiated product, and (3) easy market entry and exit.

Monopolistic competition

The process of creating real or apparent differences between goods and services.

Product differentiation

The situation in which a firm competes using advertising, packaging, product development, better quality, and better service, rather than lower prices.

Nonprice Competition

A market structure characterized by (1) few large sellers, (2) either a homogeneous or a differentiated product, and (3) difficult market entry.

Oligopoly

A condition in which an action by one firm may cause a reaction from other firms.

Mutual interdependence

A demand curve facing an oligopolist that assumes rivals will match a price decreases, but ignore a price increase

Kinked demand curve

A price strategy in which a dominant firm sets the price for an industry and the other firms follow

Price leadership

A group of firms that formally agree to reduce competition by coordinating the price and output of a product

The theory of monopolistic competition predicts that in long-run equilibrium, a monopolistically competitive firm will
A) produce at the level in which price equals long-run average cost
B) operate at minimum long-run average cost
C) overutilize its insufficient capacity
D) None of the above

~A~

Which of the following statements best describes the price, output, and profit conditions of monopolistic competition?
A) Price will equal marginal cost at the profit maximizing level of output; profits will be positive in the long run
B) Price will always equal average variable cost in the short run, and either profits or losses may result in the long run
C) Marginal revenue will equal marginal cost in the short run, profit-maximizing level of output; in the long run, economic profit will be zero
D) Marginal revenue will equal average total cost in the short run; long run economic profits will be zero

An oligopoly is a market structure in which
A) one firm has 100 percent of a market
B) there are many small firms
C) there are many firms with no control over price
D) there are few firms selling either a homogeneous or differentiated product

~D~

Mutual interdependence among firms in an oligopoly means that
A) firms never practice price leadership
B) firms never form a cartel
C) it is difficult to know how firms will react to decisions of rivals
D) no formal agreement is possible among firms

~C~

A common characteristic of oligopolies is
A) interdependence in pricing decisions.
B) independent pricing decisions
C) low industry concentration
D) few or no plant-level economies of scale